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IRS Clarifies Non-Deductibility of Expenses Paid With Forgiven PPP Loan Proceeds

May 01, 2020

By: Amanda Wilson 

The Paycheck Protection Program (“PPP”) included in the CARES Act allows businesses with 500 or fewer employees to receive loans to pay payroll costs, rent and certain other expenses. PPP loans can later be forgiven if the employer retains its employees and satisfies other requirements (a discussion of these requirements can be found here).

The CARES Act provides that the amount of any PPP loan that is later forgiven does not give rise to taxable income. Without this provision, the forgiveness of the loan would constitute taxable income in the form of cancellation of indebtedness income.

One question that I repeatedly get asked is whether businesses that used PPP loan proceeds to pay deductible expenses (such as payroll or rent) are able to deduct these expenses if the PPP loan is later forgiven. Unsurprisingly, the IRS has answered that question with a resounding no.  

In Notice 2020-32, issued yesterday, the IRS states that because the amount of the forgiven loan is excluded from income, the forgiven loan is a class of exempt income under Section 265 of the Internal Revenue Code. As a result, Section 265(a)(1) applies, which disallows a deduction otherwise allowable under the Internal Revenue Code if allocable to one or more classes of exempt income (other than interest income).

In other words, the IRS determined that any otherwise deductible expenses funded by PPP loan proceeds that are subsequently forgiven are not deductible. This position is not surprising, as otherwise businesses would have gotten a double tax benefit from the PPP loan forgiveness program.

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Amanda

A member of the firm’s tax practice, Amanda Wilson concentrates on federal tax planning and structuring. She represents clients in a wide variety of complex federal tax matters with a particular emphasis on pass-through entities such as partnerships, S corporations and real estate investment trusts. Specifically, Amanda focuses on advising clients on the formation, operation, acquisition and restructuring of such pass-through entities. In addition, she regularly advises clients on the structuring and operation of private equity funds, real estate funds and timber funds. Amanda is the author of the Bloomberg Tax Management Portfolio 718-3rd Edition, Partnerships- Disposition of Partnership Interests or Partnership Business; Partnership Termination.

Amanda regularly works in structuring deals to benefit from tax advantaged structures, including like-kind exchanges, new market tax credits, low income housing tax credits, and qualified opportunity zones. Amanda also has extensive experience in corporate planning and international tax matters, as well as federal tax controversy. Her practice before the Internal Revenue Service (IRS) includes providing advice on audits and appeals, drafting protests and ruling requests, and negotiating settlements.

Prior to joining the firm, Amanda worked for Sutherland Asbill & Brennan LLP (now Eversheds Sutherland), an Am Law 100 firm in the Atlanta office, where she was part of Sutherland’s Tax Practice Group. Amanda has also served as an adjunct professor at Emory University School of Law where she taught Partnership Taxation.

Amanda regularly contributes to the firm’s Taxing Times blog and is a regular panelist on tax webinars hosted by Strafford Publications.

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